Question 1

The following information relates to question 
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The statement of financial position of Sing Sing on that date was as follows:
 $\text { Statement of Financial Position as at } 1 \text { July } 20 \times 0$
$\begin{array}{lrlr}
&S\$&&S\$\
\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\
\text { Cash }&70,000\
&600,000&&600,000
\end{array}$ The statement of financial position of Sing Sing as at 30 June 20X1was as follows:
Statement of Financial Position as at 30 June 20X1
 $\begin{array}{lrlr}
&S\$&&S\$\
\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Trade receivables } & 250,000 & \text { Retained earnings } & 500,000 \
\text { Cash } & 300,000 & \text { Trade payables } & 85,000 \
& & \text { Income tax payable } & 15,000\&900,000&&900,000
\end{array}$ 
Relevant exchange rates are as follows:
 $\begin{array}{llll}&A\$&&S\$\
1 \text { July } 20 \times 0 & 1.00 & = & 1.25 \
30 \text { June } 20 \times 1 & 1.00 & = & 1.28 \
\text { Average } 20 \times 0-\times 1 & 1.00 & = & 1.18
\end{array}$
-If the local currency of Sing Sing is Singapore dollars and the functional currency is Australian dollars the total assets of S$900,000 would translate into Australian dollars as:
A) $703 125
B) $709 688
C) $1 141 500
D) $1 152 000

Accepted Answer

To translate the total assets from Singapore dollars (S$) to Australian dollars (A$) at the exchange rate as of 30 June 20X1, you use the rate of 1 A$ = 1.28 S$. Therefore, S$900,000 / 1.28 = A$703,125. However, the correct calculation should be S$900,000 / 1.28 = A$703,125, indicating a mistake in my initial explanation. The correct approach to find the translated amount of S$900,000 into A$ at the rate of 1 A$ = 1.28 S$ should indeed yield A$703,125, but given the options and the context, it seems there was a calculation error in interpreting the options provided. The correct translation aligns with the principle of converting the foreign currency (S$) to the functional currency (A$) using the given exchange rate at the balance sheet date (30 June 20X1). However, none of the provided options accurately reflect this calculation, suggesting a possible misunderstanding in the question's context or a typographical error in the options. The explanation aimed to clarify the conversion process, but it inadvertently highlighted a discrepancy in the provided options.

Question 2

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised:
A) as an item of gain or loss in the statement of profit or loss and other comprehensive income;
B) directly in the retained earnings account;
C) as a deferred asset or liability;
D) as a separate component of equity.

Accepted Answer

Exchange differences arising from the translation of foreign currency denominated financial statements into the functional currency are recognized as an item of gain or loss in the statement of profit or loss and other comprehensive income, in accordance with IAS 21. This is because such differences represent the gain or loss that has resulted from changes in exchange rates between the functional currency and the foreign currency in which the financial statements were originally prepared.

Question 3

When translating into the functional currency monetary liabilities are translated using the:
A) exchange rate current at the date the item was first recorded;
B) exchange rate prevailing at the end of the last reporting period;
C) closing exchange rate;
D) exchange rate current at end of reporting period.

Accepted Answer

D

Question 4

The following information relates to question 
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The statement of financial position of Sing Sing on that date was as follows:
 $\text { Statement of Financial Position as at } 1 \text { July } 20 \times 0$
$\begin{array}{lrlr}
&S\$&&S\$\
\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\
\text { Cash }&70,000\
&600,000&&600,000
\end{array}$ The statement of financial position of Sing Sing as at 30 June 20X1was as follows:
Statement of Financial Position as at 30 June 20X1
 $\begin{array}{lrlr}
&S\$&&S\$\
\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Trade receivables } & 250,000 & \text { Retained earnings } & 500,000 \
\text { Cash } & 300,000 & \text { Trade payables } & 85,000 \
& & \text { Income tax payable } & 15,000\&900,000&&900,000
\end{array}$ 
Relevant exchange rates are as follows:
 $\begin{array}{llll}&A\$&&S\$\
1 \text { July } 20 \times 0 & 1.00 & = & 1.25 \
30 \text { June } 20 \times 1 & 1.00 & = & 1.28 \
\text { Average } 20 \times 0-\times 1 & 1.00 & = & 1.18
\end{array}$
-If the functional currency of Sing Sing is Singapore dollars and the presentation currency is Australian dollars the total assets of S$900,000 would translate into Australian dollars as:
A) $703 125
B) $709 688
C) $1 141 500
D) $1 152 000

Accepted Answer

The total assets of S$900,000 are translated using the closing rate of 1.28 S$/A$, resulting in A$703,125 (S$900,000 / 1.28).

Question 5

In order for the financial statements of a foreign operation to be included in the consolidated financial statements of the parent it is necessary to translate the foreign operation's financial statements into:
A) the presentation currency of the reporting entity;
B) the functional currency of the foreign operation;
C) the local currency of the foreign operation;
D) the domestic currency of the foreign operation;

Accepted Answer

The financial statements of a foreign operation must be translated into the presentation currency of the reporting entity (the parent company) in order to be included in the consolidated financial statements. This ensures comparability and consistency across all operations included in the consolidated financial statements.

Question 6

When an entity has an investment in a foreign domiciled entity it is necessary to translate the financial statements of the foreign operation to the currency used by the investor:
A) regardless of the ownership interest in the entity
B) only where the entity is a wholly owned subsidiary
C) where the investor has control over the foreign entity
D) where the investment is material to the investor

Accepted Answer

The translation of the financial statements of a foreign operation is only necessary when the investor has control over the foreign entity, as defined by IFRS 10. Control is defined as the ability to direct the relevant activities of an entity that significantly affect its returns, and the investor must have the power to govern the financial and operating policies of the investee. This applies regardless of the ownership interest in the entity or whether the investment is material to the investor.

Question 7

Indicators pointing towards the local overseas currency as the functional currency include, that the: 
I. Parent's cash flows are directly affected on a current basis.
II. Cash flows are primarily in the local currency and do not affect the parent's cash flows.
III. Sales prices are primarily responsive to exchange rate changes in the short-term.
IV. Production costs are determined primarily by local conditions.
A) I and III only;
B) II and IV only;
C) I, III and IV only;
D) I, II and IV only.

Accepted Answer

Indicators that the local overseas currency is the functional currency include that cash flows are primarily in the local currency and do not affect the parent's cash flows (II) and that production costs are determined primarily by local conditions (IV). These factors suggest the subsidiary operates independently of the parent company's currency environment.

Question 8

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the:
A) exchange rate at the date when the value was determined;
B) exchange rate current at end of reporting period;
C) closing exchange rate for the financial year;
D) exchange rate at the transaction date.

Accepted Answer

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the exchange rate at the date when the value was determined. This is because the fair value method requires the current market value of assets and liabilities, and the exchange rate at the date of determining the value is the most accurate reflection of that market value.

Question 9

Where a change in the functional currency occurs, the translation procedures as outlined in IAS 21 The Effects of Changes in Foreign Exchange Rules, apply:
A) prospectively, from the date of the change;
B) prospectively, from the next reporting date;
C) retrospectively and must be adjusted in the opening balance of retained earnings;
D) retrospectively and must be adjusted directly into the current period profit or loss.

Accepted Answer

The translation procedures outlined in IAS 21 for a change in functional currency are applied prospectively from the date of the change. This means that the new rules are used for all transactions and balances from the date of the change forward, without altering historical financial statements.

Question 10

Post acquisition date retained earnings that are denominated in a foreign currency are:
A) translated into the functional currency using the rate current at the latest end of reporting period;
B) translated into the functional currency using the average rate since acquisition date;
C) translated into the functional currency using the rates at the end of each year since acquisition date;
D) balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.

Accepted Answer

The answer of Post acquisition date retained earnings that are...

Question 11

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:
A) translate all liabilities using the current rate existing at end of reporting period;
B) first classify the liabilities into current and non-current;
C) first classify the liabilities as monetary or non-monetary;
D) translate all liabilities using the rate current on entering into the transaction.

Accepted Answer

The best choice is to first classify the liabilities as monetary or non-monetary. Monetary liabilities are those obligations to pay a fixed or determinable amount of money, such as trade payables, loans, and bonds. Non-monetary liabilities, such as warranties and contingencies, are not subject to revaluation because they do not involve future cash payments or receipts. Monetary liabilities should be translated at the exchange rate at the end of the reporting period, while non-monetary liabilities should be translated using the historical exchange rate.

Question 12

The following information relates to questions 
On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000.  At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows:
$\begin{array}{ll}
1 \text { January 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.20 \
31 \text { December 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.40 \
\text { Average for the year } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.30
\end{array}$
-The goodwill arising on Claudia's acquisition of Saskia is:
A) NZ$77 600;
B) NZ$88 800;
C) A$93 120;
D) A$422 000.

Accepted Answer

The goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The fair value of the net assets is calculated as follows:Share capital                               NZ$2,000,000Retained earnings                        NZ$1,440,000Land                                             NZ$200,000Equipment                                   NZ$80,000                                                  NZ$3,720,000The purchase price is A$2,498,000, which is equivalent to NZ$2,997,600 (A$2,498,000 x 1.20). Therefore, the goodwill is NZ$77,600 (NZ$2,997,600 - NZ$3,720,000).

Question 13

Monetary items are best described as:
A) plant and equipment;
B) units of currency held and assets and liabilities to be received or paid in fixed numbers of currency units;
C) all intangible items including goodwill;
D) all items that are contingent in nature.

Accepted Answer

Monetary items are assets and liabilities that are fixed in terms of a specific currency, such as cash, accounts receivable, and accounts payable. They are generally held or to be received/paid in fixed numbers of currency units. Option A and C are incorrect as plant and equipment and intangible items are not necessarily monetary in nature. Option D is also incorrect as contingent items are not fixed in terms of a specific currency.

Question 14

Differences arise in relation to the treatment of which of the following when translating from the local to functional currency as opposed to the functional to presentation currency?
A) accounts receivable
B) cost of goods sold
C) depreciation expense
D) share capital

Accepted Answer

Depreciation expense is allocated differently under different currency translations, depending on whether the translation is from local currency to functional currency or from functional currency to presentation currency. Accounts receivable, cost of goods sold, and share capital are generally treated similarly under both translations.

Question 15

Mortimer Limited has the following items in its statement of profit or loss and other comprehensive income: Revenue FC60 000,
Cost of goods sold FC25 000,
Interest expense FC8 000,
Income tax expense FC10 000.
All items arose evenly across the year. The following exchange rates applied:
$\begin{array}{lll}
\text { End of reporting period } & F C 1= & \$ 0.80 \
\text { Average rate for year } & F C 1= & \$ 0.75
\end{array}$
The net profit after tax translated into the presentation currency is:
A) $12 750;
B) $13 600;
C) $21 250;
D) $26 667.

Accepted Answer

The net profit after tax in functional currency is FC17,000 (Revenue FC60,000 - Cost of goods sold FC25,000 - Interest expense FC8,000 - Income tax expense FC10,000). Using the average exchange rate of FC1 = $0.75, the translated net profit is $12,750 (FC17,000 * $0.75).

Question 16

The following information relates to questions 
On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000.  At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows:
$\begin{array}{ll}
1 \text { January 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.20 \
31 \text { December 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.40 \
\text { Average for the year } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.30
\end{array}$
-The adjustment to the foreign currency translation reserve on 31 December 20X3 relating to the revaluation of the land if the functional currency of Saskia is New Zealand dollars is:
A) 5 953 debit
B) 5 953 credit
C) 17 857 debit
D) 17 857 credit

Accepted Answer

The answer of The following information relates to questions 
On...

Question 17

By applying the definition provided in IAS 21 The Effects of Changes in Foreign Exchange Rates, the following items will be regarded as a monetary item:
A) property, plant and equipment;
B) land and buildings;
C) inventory;
D) accounts receivable.

Accepted Answer

According to IAS 21, a monetary item is "an amount of a currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency." Accounts receivable meet this definition as they involve the receipt of a fixed or determinable number of units of currency. Property, plant and equipment, land and buildings, and inventory involve physical assets and are not monetary items.

Question 18

When translating the revenue and expenses in the statement of profit or loss and other comprehensive income, theoretically each item of revenue and expense should be translated using the spot exchange rate between the:
A) functional currency and the foreign currency on the reporting date;
B) presentation currency and the functional currency on the reporting date;
C) functional currency and the foreign currency on the date the transaction occurred;
D) presentation currency and the local currency on the transaction date.

Accepted Answer

Theoretically, each item of revenue and expense should be translated using the spot exchange rate between the functional currency and the foreign currency on the date the transaction occurred. This approach reflects the value of the transactions at the time they were made.

Question 19

When translating into the functional currency foreign currency denominated non-monetary items measured using historical cost must be translated using the:
A) rate current at end of reporting period;
B) average rate for the reporting period;
C) exchange rate at the date of the transaction;
D) rate prevailing at the end of the last financial year.

Accepted Answer

Non-monetary items measured using historical cost, such as property, plant, and equipment, are translated at the exchange rate at the date of the transaction. This is because the historical cost of these assets reflects their original cost in the foreign currency at the time of acquisition, and this cost should not be adjusted for subsequent changes in the exchange rate.

Question 20

When translating into the presentation currency the translation difference is recognised:
A) in profit or loss
B) as a separate component of equity
C) in retained earnings
D) as an asset or liability, depending on whether it is a debit or credit balance.

Accepted Answer

According to IFRS, translation differences arising from the conversion of the financial statements of a foreign operation into the presentation currency should be recognized in equity as a separate component of comprehensive income. Specifically, it is recognized in other comprehensive income (OCI) and accumulated in a separate component of equity known as the "translation reserve." The translation reserve is reported separately from retained earnings to ensure that the translation difference does not distort the true performance and financial position of the reporting entity.

Quiz 19: Translation of the Financial Statements of Foreign Entities

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised:

When translating into the functional currency monetary liabilities are translated using the:

In order for the financial statements of a foreign operation to be included in the consolidated financial statements of the parent it is necessary to translate the foreign operation's financial statements into:

When an entity has an investment in a foreign domiciled entity it is necessary to translate the financial statements of the foreign operation to the currency used by the investor:

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the:

Where a change in the functional currency occurs, the translation procedures as outlined in IAS 21 The Effects of Changes in Foreign Exchange Rules, apply:

Post acquisition date retained earnings that are denominated in a foreign currency are:

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:

Monetary items are best described as:

Differences arise in relation to the treatment of which of the following when translating from the local to functional currency as opposed to the functional to presentation currency?

By applying the definition provided in IAS 21 The Effects of Changes in Foreign Exchange Rates, the following items will be regarded as a monetary item:

When translating the revenue and expenses in the statement of profit or loss and other comprehensive income, theoretically each item of revenue and expense should be translated using the spot exchange rate between the:

When translating into the functional currency foreign currency denominated non-monetary items measured using historical cost must be translated using the:

When translating into the presentation currency the translation difference is recognised: